Ireland warns of damage from British EU opt-out

Wed Dec 14, 2011 8:57am EST

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* Analysts say consequences could be more far reaching

By Conor Humphries and Neal Armstrong

DUBLIN/LONDON, Dec 14 (Reuters) - Ireland warned on Wednesday its financial services industry may be at risk from Britain's opt-out from closer EU integration but the damage for Dublin could go a lot deeper without its closest neighbour at the European negotiating table.

The Irish government is scrambling to limit the diplomatic damage after Britain last week refused to join the European Union's other 26 countries in working towards a new fiscal union, leaving Dublin more exposed to German and French calls for tighter financial regulation.

Of particular concern to Ireland, a major centre for funds administration in Europe, is a proposed pan-European financial services tax that could bypass Britain.

"Obviously there will be disadvantages for Ireland if a financial transaction tax will be applied in Dublin and not be applied in London as well," Finance Minister Michael Noonan told reporters in London ahead of a meeting with British Chancellor George Osborne.

"We in Ireland would prefer if this was an agreement of the 27."

Prime Minister David Cameron cited the need to protect Britain's financial services industry as the reason for refusing to sign up to closer fiscal union last Thursday night.

But analysts said the sidelining of Britain poses far more fundamental problems for Ireland.

Despite a bloody shared history, Dublin is ideologically closer to London than it is to Brussels and piggybacks on its larger neighbour's clout in negotiations.

"Diplomatically speaking, we're in a much poorer position because Britain is not in the room," said Hugo Brady, senior research fellow at the Centre for European Reform.

"They were quite willing and quite happy to be the difficult partner so you could hide behind them in diplomatic negotiations," he said. "By basically doubling or tripling our chances of getting isolated, Britain has done us no favours."

BALANCING ACT

Ireland has been one of the most pro-European members of the union, in part because it allowed the country to cut its centuries-old political and economic dependence on former colonial master Britain.

The decision to join the euro and abandon the Irish punt, which was pegged to sterling until 1979, marked a decisive economic shift from Britain, 80 years after securing political independence.

But the risk of a sharp rift with Britain has raised alarm bells even among Irish nationalists.

"Ireland is not best served by having one less ally in the discussions," said Micheal Martin, head of the opposition Fianna Fail party, which was founded to defend Irish interests against British dominance.

The United Kingdom has been a key ally of Ireland in resisting French and German attempts to harmonize taxes across the European Union, which threaten Ireland's low 12.5 percent corporate tax rate, seen as essential in attracting foreign investment and supporting the local economy.

It has also resisted pressure from Paris and Berlin to boost pan-European regulation of financial and labour markets.

REFERENDUM RISK

While Noonan was in London, European Minister Lucinda Creighton was in Paris warning that Ireland had "a very deep concern" about the plans for 26 countries to go ahead without Britain.

Prime Minister Enda Kenny spoke to Cameron on Tuesday evening and said he would keep in close contact with him in the coming weeks.

"This is a disappointing development," the Irish premier told parliament on Wednesday. "The UK is our closest neighbour and very often our stanchest ally at the European table."

Britain's decision to opt out of the treaty could also cause political problems for the Irish government, which is keen to avoid putting its participation in the new fiscal union to a referendum.

Irish law allows the government to avoid a referendum if a change is "necessitated by the obligations of membership," of the European Union, but Britain's choice to remain in the EU but outside of the fiscal union makes a referendum more likely, according to Gavin Barrett, a law lecturer at University College Dublin.

Creighton said on Friday she thought there was a 50:50 chance a referendum would be held.

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